A company is not known just by it's name but by the financial strength of its management, the market reputation of the Chairman/Managing Director or the promoter group. When a bank sanctions loans, it is these factors that they consider. Similarly, when a company raises private loans, it is raised on the face of the Promoter. When the company takes goods/services from a manufacturer/supplier on the basis of post dated cheques, the goodwill of the directors weigh.

It is on this premise/misconception that people file complaint u/s 138 of Negotiable instruments Act, 1908 for default for dishonour of cheques against the directors and not against the defaulting company. The prime reason for filing complaint against the signatory/ Director/ MD/CEO is to pressurise them to make payment for fear of criminal proceedings against them. But, the Apex Court has categorically ruled that such a complaint u/s 138 of the NI Act against the Directors without prosecuting the company is not maintainable.

It would be relevant to reproduce Section 138 & 141 of the NI Act, 1881 which read as under: Section 138 in The Negotiable Instruments Act, 1881 138 Dishonour of cheque for insufficiency, etc., of funds in the account.

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless:

1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;
2. the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
3. the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability.

141 Offences by companies:

1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence:
   Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.
    
2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
   Explanation: For the purposes of this section:
   
   1. "company" means any body corporate and includes a firm or other association of individuals; and
   2. "director", in relation to a firm, means a partner in the firm."
      
      In would be trite to refer to the case of Aneeta Hada Vs. Godfather Travels and Tours Pvt. Ltd. and Ors. (2012) 5 SCC 661 wherein the 3 member bench of the Apex Court, dealing with the same subject, held as under:
      58. Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others.
      
      Thus, the words "as well as the company" appearing in the section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability. If a finding is recorded against it, it would create a concavity it its reputation. There can be situations when the corporate reputation is affected when a Director is indicted.
      
      59. In view of our aforesaid analysis, we arrive at irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself. We say so on the basis of the ratio laid down in C.V. Parekh which is a three-Judge Bench decision.
      
      Thus, the view expressed in Sheoratan Agarwal does not correctly lay down the law and, accordingly, is hereby overruled. The decision in Anil Hada is overruled with the qualifier as stated in para 51. The decision in Modi Distillery has to be treated to be restricted to its own facts as has been explained by us hereinabove."
      
      It is apropos to refer to the case of State of Madras vs C.V. Parekh And Anr. (1970) 3 SCC 491 in which a 3 member bench of the Apex Court dealt with Section 10 of the Essential Commodities Act and held that a director of a Company cannot be prosecuted until the Company has been prosecuted. The Court categorically held thus:
3. Learned Counsel for the appellant, however, sought conviction of the two respondents on the basis of Section 10 of the Essential Commodities Act under which, if the person contravening an order made under Section 3 (which covers an order under the Iron and Steel Control Order, 1956) is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the Company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
   
   It was urged that the two respondents were in charge of, and were responsible to, the company for the conduct of the business of the company and, consequently, they must be held responsible for the sale and for thus contravening the provisions of Clause 5 of the Iron and Steel (Control) Order.
   
   This argument cannot be accepted, because it ignores the first condition for the applicability of Section 10 to the effect that the person contravening the order must be a company Itself. In the present case, there is no finding either by the Magistrate or by the High Court that the sale in contravention of Clause 5 of the Iron & Steel (Control) Order was made by the Company. In fact, the Company was not charged with the offence at all.
   
   The liability of the persons in charge of the Company only arises when the contravention is by the Company itself. Since, in this case, there is no evidence and no finding that the Company contravened Clause 5 of the Iron & Steel (Control) Order, the two respondents could not be held responsible. The actual contravention was by Kamdar and Villabhadas Thacker and any contravention by them would not fasten responsibility on the respondents. The acquittal of the respondents is, therefore, fully justified. The appeal fails and is dismissed."
   
   The declaration of law by the Apex Court in Aneeta Hada (supra) is applicable in all pending proceedings. The Apex Court in the case of Ajit Balse v. Ranga Karkare, (2015) 15 SCC 748 has categorically held thus: "16. The learned counsel appearing on behalf of the respondent while accepting that Adivasi Machua Samiti, Sirsida on whose behalf cheque was issued was not impleaded as the accused before the trial court, contended that the judgment in Aneeta Hada case cannot be made applicable retrospectively in respect of cases where the conviction took place much prior to the judgment.
   
   However, such objection cannot be raised in the present case. Though judgment in Aneeta Hada is prospective but is applicable in all pending cases, including the trial, appeal, revision and special leave petition/appeal pending before this Court.
   
   The case of the appellants being covered by the decision in Aneeta Hada case, we set aside the impugned judgment and conviction passed by the trial court as affirmed by the appellate court and the impugned order dated 31-8-2012 passed by the High Court of Chhattisgarh at Bilaspur in Criminal Revision No. 365 of 2012."
   
   It is thus the mandate of law, as declared by the Apex Court that as per Section 138 read with Section 141 of NI Act, the Director of a company cannot be prosecuted without making company as accused. Moreover, the aforesaid declaration of law by the Apex Court is applicable in all pending proceedings whether in trial, appeal, revision and SLP/ Appeal pending before the Apex Court.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]